3 ms·

Thanks for the detailed responses. A couple follow up questions. Or I guess two variants on the same deeply held instinct I hold, but maybe I need to expand bey

Thanks for the detailed responses. A couple follow up questions. Or I guess two variants on the same deeply held instinct I hold, but maybe I need to expand beyond animal brain thinking? OK, so real profits (due to a real pricing discontinuity) and no counterparty risk. Fair enough. But beyond that, in my mind it seems like there has to be some way for this trade to either blow up or that it has insane capital maintenance requirements for potential returns.

lxgr 3y ago
Imagine a market with three currencies/commodities: A, B, C. One A trades for 10 B, one B trades for 10 C, but somehow one A trades for only 50 C when exchanged directly. There's a clear arbitrage opportunity here: Sell one A for 10 B, sell the 10 B for 100 C, and finally go to the person willing to give you an A for 50 C – and buy two. You started out with one A and ended up with two. This is great! Now repeat that until the arbitrage opportunity disappears and get rich in the process. Now here's the question/idea: If you can do these three trades atomically, why do you need a single A to being with? This is what "flash loans" (or any equivalent system involving multilateral netting) allow.
- deleted 3y ago
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- aleksiy123 3y ago
  The key being that you don't need any capital to perform the arbitrage. You just focus on finding on opportunities and aren't limited by your bank roll. Meanwhile the lender just focuses on providing capital and is happy making a risk free loan for a fee. And in this everyone is happy. You make money, lender makes money, and sellers and buyers get their asks. Is that correct?
  - lxgr 3y ago
    I'd say yes, except for this part: > lender makes money, Theoretically, there is no need for a lender. "I borrow 1 trillion from pension funds X, do <some complex sequence of trades>, and in the end return the trillion to X, all within zero seconds" and "I perform <some complex sequence of trades>, requiring net-zero capital from my end" are equivalent statements. Rational actors should recognize them as such, and the marginal cost of lending (interest) should converge to zero – in other words, X should concede that they do not provide anything valuable to the trade. Practically, existing protocols might not be amenable to that insight, and the lending market is apparently too inefficient to support 0% flash loans – at least for now. So the value that X provides is protocol backwards compatibility, I suppose!
    - dmacedo 3y ago
      Of course there's a need for a lender, even at a microsecond transaction you do need funds to perform arbitrage, it's not just all theoretical funds - there's backing to them. Else let's all just pretend trade on a real market until it collapses and just make sure they come a-knockin' on some non-existent firm... Plus my conjecture, from my understanding, is the flash loan terms incentivise fast payback, whilst still retaining some fixed profit. Akin to a credit card which has an effective 0% rate of you pay back within a certain time frame, but raises to 30% monthly after that. I'd be happy to provide you with a flash loan at 0.001% fixed rate of profit for me/cost for you for the first 5mins and scare you with a 30% rate calculated every minute after that. For some pre-validated huge sum I know your business can be liable for, of course. Which allows capital scarce firms to leverage these micro-loans on fast arbitrage opportunity where they should take any transaction that provides anything larger than that 0.001% in transacted profit. And let's them compete with larger firms on optimising pricing.
      - lxgr 3y ago
        It’s not a microsecond, it is zero seconds. The entire series of trades either succeeds as a bundle, or does not happen at all. This is quite different from "normal" arbitrage, which consists of a series of non-atomic trades. There’s various risks here, both on the side of the arbitrageur (offer books can change, making the trade non-profitable halfway through) and by extension for all counterparties (due to the arbitrageur not being able to settle for the promised/borrowed amount), as well as non-zero time of locking up capital. Both have a price.
    - imtringued 3y ago
      If a bank does this they can create and then delete their own money without having to pay anyone interest.

lxgr 3y ago

Imagine a market with three currencies/commodities: A, B, C. One A trades for 10 B, one B trades for 10 C, but somehow one A trades for only 50 C when exchanged directly. There's a clear arbitrage opportunity here: Sell one A for 10 B, sell the 10 B for 100 C, and finally go to the person willing to give you an A for 50 C – and buy two. You started out with one A and ended up with two. This is great! Now repeat that until the arbitrage opportunity disappears and get rich in the process. Now here's the question/idea: If you can do these three trades atomically, why do you need a single A to being with? This is what "flash loans" (or any equivalent system involving multilateral netting) allow.

deleted 3y ago
[deleted]
aleksiy123 3y ago
The key being that you don't need any capital to perform the arbitrage. You just focus on finding on opportunities and aren't limited by your bank roll. Meanwhile the lender just focuses on providing capital and is happy making a risk free loan for a fee. And in this everyone is happy. You make money, lender makes money, and sellers and buyers get their asks. Is that correct?
- lxgr 3y ago
  I'd say yes, except for this part: > lender makes money, Theoretically, there is no need for a lender. "I borrow 1 trillion from pension funds X, do <some complex sequence of trades>, and in the end return the trillion to X, all within zero seconds" and "I perform <some complex sequence of trades>, requiring net-zero capital from my end" are equivalent statements. Rational actors should recognize them as such, and the marginal cost of lending (interest) should converge to zero – in other words, X should concede that they do not provide anything valuable to the trade. Practically, existing protocols might not be amenable to that insight, and the lending market is apparently too inefficient to support 0% flash loans – at least for now. So the value that X provides is protocol backwards compatibility, I suppose!
  - dmacedo 3y ago
    Of course there's a need for a lender, even at a microsecond transaction you do need funds to perform arbitrage, it's not just all theoretical funds - there's backing to them. Else let's all just pretend trade on a real market until it collapses and just make sure they come a-knockin' on some non-existent firm... Plus my conjecture, from my understanding, is the flash loan terms incentivise fast payback, whilst still retaining some fixed profit. Akin to a credit card which has an effective 0% rate of you pay back within a certain time frame, but raises to 30% monthly after that. I'd be happy to provide you with a flash loan at 0.001% fixed rate of profit for me/cost for you for the first 5mins and scare you with a 30% rate calculated every minute after that. For some pre-validated huge sum I know your business can be liable for, of course. Which allows capital scarce firms to leverage these micro-loans on fast arbitrage opportunity where they should take any transaction that provides anything larger than that 0.001% in transacted profit. And let's them compete with larger firms on optimising pricing.
    - lxgr 3y ago
      It’s not a microsecond, it is zero seconds. The entire series of trades either succeeds as a bundle, or does not happen at all. This is quite different from "normal" arbitrage, which consists of a series of non-atomic trades. There’s various risks here, both on the side of the arbitrageur (offer books can change, making the trade non-profitable halfway through) and by extension for all counterparties (due to the arbitrageur not being able to settle for the promised/borrowed amount), as well as non-zero time of locking up capital. Both have a price.
  - imtringued 3y ago
    If a bank does this they can create and then delete their own money without having to pay anyone interest.